Game of Loans: Options to Take Full Advantage of Your Home Equity

You spent a ton of money to get your home and that makes it a huge investment opportunity. Every time you make a payment, you gain equity in your home. Your equity grows even faster in an environment where home values are rising, as they are now.

That equity can be converted into cash to unlock the true investment potential of your home. It can be used to pay off home improvements, augment a college fund or give your retirement fund a boost. In this post, we’ll go over your options for making your equity work for you, including home equity loans and cash-out refinances.

Home Equity Loans

One of the more popular options to take advantage of your home value is a home equity loan. However, while you may be aware that it exists, what are these loans and what are the pros and cons?

What Is a Home Equity Loan?

Your stake in your home has been built up over time as you make payments as well as when your home increases in value after you purchase it. A home equity loan involves converting this value that’s been built up into a financial instrument that can help you accomplish a goal.

Unlike the cash-out refinance, a home equity loan is a second mortgage taken out in addition to a primary mortgage.

Pros and Cons of a Home Equity Loan

Now that you know what it is, let’s go over the points for and against home equity loans. Although cash-out refinances serve the same purpose, they each have advantages and disadvantages based on the way the loans are structured.

Pros

These allow you to take advantage of the home equity you’ve currently built up by taking out a second mortgage against your existing home equity – the amount of your loan that’s currently paid off – in order to make home improvements, for example. There may be limits set by lenders or investors in the loan regarding how much of this existing equity you can take a loan against.

The upside to this is that you have the option to go with a fixed payment. That way, your payment never changes, and you know what you’re getting.

Home equity loans also give you the flexibility to hold onto the existing rate and term of your primary mortgage if you’re happy with it. Some would rather have the flexibility of paying on a separate loan rather than touch their primary mortgage.

If you’re looking to purchase a home, sometimes people will choose to take a primary mortgage and then use a secondary mortgage so they can bring their total equity down to 80% and avoid paying for mortgage insurance. It depends on the client, but doing this may sometimes be cheaper than the mortgage insurance policy. Be aware that if you’re going to do this, your lender may require you to make a slightly higher down payment (e.g. 10% or more) in order to have the option to take a second mortgage on a purchase.

Cons

There are downsides. With home equity loans, you’re going to pay a higher rate than you would if it were your first mortgage since home equity loans are a second mortgage.

The reasoning for this is that lenders assume that you’re going to make the payment on your primary mortgage first. The lender that made the home equity loan also gets a lien on your house, but the primary lender’s lien takes precedence. In exchange for the additional risk, the lender on the second mortgage will charge you more.

The last downside is that you have two mortgage payments to worry about. It can complicate things.

Quicken Loans doesn’t offer home equity loans at this time.

Cash-Out Refinance

Every situation is different, so we always recommend talking to a financial advisor. In many cases, however, the best option for utilizing your home equity is going to be a cash-out refinance. It features many of the benefits of the other two options but also has a couple of key advantages. But first, let’s go over some basics.

What’s a Cash-Out Refinance?

Like home equity loans, you utilize your existing home equity and convert it into money you can use in a cash-out refinance. The difference here is that you aren’t taking out a second mortgage. It’s your primary mortgage.

How Does a Cash-Out Refinance Work?

With any of these loans, the more equity you have, the more you can take and convert to cash if you need it. With a cash-out refinance, it’s especially important to take this into consideration. Why?

When you take cash out of your primary mortgage, you have to leave a certain amount of equity in your home. The exact amount depends on the type of loan you’re using.

With a conventional loan, you need to leave 15 – 20% equity in your home. FHA loans allow you to leave just 15% equity, but you’ll have to pay mortgage insurance premiums, so it’s something to think about. Finally, if you’re an eligible active-duty service member, veteran or surviving spouse, you can actually take out a loan for up to 100% of the appraised value of your property. This gives you the opportunity to maximize the impact of a renovation college fund or retirement savings boost.

Pros and Cons of a Cash-Out Refinance

As with home equity loans, if you take cash out, there are pros and cons. Let’s run through them.

Pros

The first big advantage here is because you only have one mortgage against your house. That means there’s less risk for the lender and you’ll get a better rate than you would if it were a second mortgage.

It may also be preferable because you only need to budget for one mortgage payment every month. This could help simplify your finances.

Cash-out refinances are often the best way to consolidate debt because they’re based on your primary mortgage, you’re getting the lowest possible mortgage rate for your financial profile. Mortgage rates recently have been in the high 4% to low 5% range for a 30-year fixed.

By taking cash out to pay off high-interest debt like credit card balances, you can potentially save yourself a lot of money when compared to paying off the balances incrementally over time.

A cash-out refinance is also good for helping you accomplish other financial goals because of the relatively low interest charges. These may include boosting a college or retirement fund or getting home improvements done.

Cons

While you can get the lowest rate on your loan because it’s tied to your primary mortgage, this also has its disadvantages.

As discussed above, if you want to take advantage of a cash-out refinance, you usually have to leave a minimum amount of equity within the home. Because of this, it’s very important to make sure that you can take out enough home value to accomplish your goal. If you don’t have enough equity to get the job done, you might take a look at alternatives like a second mortgage or personal loan.

Although the lowest rates for taking cash out are available to those who refinance their primary property, some people may wish to take a second mortgage if they really like their primary mortgage rate and don’t want their payment to change.

Which One Is Right for Me?

So, given everything we’ve gone over, is the best option for you a home equity loan or cash-out refinance? The answer very much depends on your personal situation. We absolutely recommend speaking with a financial advisor. However, we can take this space to briefly summarize some of the key points to consider.

You’re using it in place of or in combination with a cash-out refinance in order to access more of your home’s value

A cash-out refinance is best if:

You have plenty of equity to accomplish your goal and you want the lowest rate

You’re attracted to the low rate for debt consolidation purposes, home improvement or fortifying investments

You would like to keep a single mortgage payment

Now that we’ve reached the end of this article, you should have a better idea of the differences between a home equity loan and cash-out refi as well as some of the factors that go into determining which is right for you. If you’re ready to get started, you can apply online here or give us a call at (800) 785-4788. If you still have questions, you can leave us a note in the comments below.

If you don’t want to tap into your home equity or don’t have enough built up to accomplish your financial goals, a personal loan could be a good option that might make more sense for your financial situation. Our friends at Rocket Loans® offer personal loans up to $45,000.

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This Post Has 24 Comments

Hello, Gale! My name is Patrick, and I work on the Quicken Loans Zing Blog. We may have some options for you, but we’ll need some more information about your situation first. Please call (888) 980-6716 or add your information here to speak with one of our Home Loan Experts. They’ll look at your situation and provide the best option. Thanks, and have a nice night!

We don’t do second mortgages, but we can help you take cash-out of your primary mortgage. Odds are you’ll get a better rate on this than you would on a second mortgage because when it’s a second mortgage, the lender assumes more risk due to the fact that you’re likely to make your payment on your primary mortgage first. If you’d like to go over your options online, you can do so through Rocket Mortgage. If you’d rather get started by talking to one of our Home Loan Experts, you can give us a call at (888) 980-6716.

Thanks for choosing us Michael! We don’t do home equity loans, but we do cash-out refinances. Since this is your primary mortgage, it carries less risk on our end. This is good for you because you can get a better rate. I’m going to recommend you talk to one of our Home Loan Experts by filling out this form or calling (888) 728-4702.

I have an existing loan with Quicken loans. The equity has double since we bought it. We are an older couple and this is our final home. We are in the middle of winter and our heating system is shot. It will take $8,000 to do the job right. I would like to do a cash out refinance ASAP, Can you help. Please respond. Thank you Kathy. E mail only please.

I’m sorry to hear about your heating system. We can definitely look into your options. Rocket Mortgage will allow you to share information about your income and assets as well as pull your own credit. You could have a customized solution in minutes. Otherwise, you can get started over the phone by calling 888-728-4702. Good luck and stay warm!

Im looking to do some home improvements and pay some small bills off and maybe purchase a vehicle. would a cash out refi be the way to go? Im confused on what would work best for us.I have alot of equity built up and need some advice because i dont want to have a second mortgage over my head. HELP PLEASE.

We can definitely help you look into a cash-out refi. That’s not a second mortgage, but instead a new loan for your primary mortgage, so it may be what you’re looking for. Rates are also really good right now. You can use Rocket Mortgage in order to get a solution customized to your financial situation online. If you prefer to get started over the phone, you can call (888) 728-4702. Hope this helps!

My house was on the market a month ago. I want to do a cash out refi but the bank is telling me i have to wait at least 6 months for cash out option. Is this a universal truth, or is it lender-specific policy?

When you say your house was on the market a month ago, do you mean you had the property listed for sale or that you bought the property and are trying to take cash out? I’ll try to cover both scenarios:

If the property was listed for sale, you may have to wait 180 days after the property is taken off the market depending on the loan type and the amount of equity you have in the home. If your equity is 30% or more, you don’t have to wait except on jumbo loans under Quicken Loans policy.

If you bought the home, you generally have to spend six months on title before taking cash out. The exception to this is if you bought the home with cash and were doing a cash out as part of a plan for delayed financing.

We are under contract to sell our house, and close near the end of August. However, we need about $5000 for some repairs before closing, and would rather not put that on a credit card. So do you think a cash-out refinance or a personal loan would be better for us? We could pay it off when we close.

I have a couple thoughts here. First, $5000 is really too small for a mortgage. Second, most mortgage companies won’t let you do a cash-out refinance when the property is up for sale. A personal loan would make a lot more sense. Our sister company Rocket Loans could help you there.

A refinance is definitely something you can look at. The easiest way to get started is to visit Rocket Mortgage and see if we have an option that makes sense for you. You can run through the process in a few minutes and get the approval right online if it fits with your goals. If you prefer to get started over the phone, you can call 800-251-9080.

With a loan amount that small, you’re better off going with a personal loan. However, the minimum for our sister company Rocket Loans is $2,000. You may want to check around with some other lenders. I’m sure someone can help you out. Hope this helps clarify things!

I am putting a house I own ( no mortgage ) up for sale in June. I need cash now to cover our expenses……..several thousand dollars. I have never applied for a loan and hope you can help me. I would like you to send me information.